Supplier relationship management (SRM) has become a major focus within the procurement community and the economic downturn has added urgency to questions about its value and about what kinds of benefits should be targeted. Executives are wondering whether the benefits they are realising are in line with what others in the marketplace are achieving, and what value could be obtained by further investment in SRM.
In a 2008-09 study of over 500 companies, buy-side participants report realising, on average, only 54 per cent of the potential value of their supplier contracts. To provide further clarity around the business case for, and value of, SRM and to identify the characteristics of leading organisations in this area, Future Purchasing and Vantage Partners interviewed executives at companies with highly regarded SRM programmes to better understand the business objectives, which SRM approaches and practices were key to delivering value, what value they have realised and how to measure that.
The study participants were progressive procurement teams from Fortune 500 companies that had had an SRM programme in place for typically three to five years. In all, 22 European and US companies from multiple sectors participated in the study. Structured interviews were held with the initiators and leaders of the SRM programmes. In each case, procurement was the initiators of the SRM programme and facilitators of the process, but left “ownership” and day-to-day management of most relationships to business stakeholders.
Objectives and targets for SRM programmes tended to be high level. This may reflect the breadth of benefits expected and the perceived difficulty of measuring them. Specific objectives mentioned by the participants were:
- becoming a “customer of choice” to improve access to limited capacity, best talent, best ideas and new innovation;
- cost-reduction delivery through collaborative cost-out initiatives, rather than using competitive tension to squeeze suppliers’ margins;
- obtaining competitive advantage from strategic suppliers and increasing the top line;
- increasing the value obtained from current suppliers;
- becoming best in class at managing relationships, improving collaboration and relationship quality;
- managing the inbound supply risk profile.
For some procurement teams, a structured SRM programme provided a key opportunity to change stakeholders’ perception of procurement, moving it away from a narrow focus on sourcing and contracting to a more broadly orientated, commercial function.
Approaches and strategies
All of the organisations we spoke with had developed an SRM process and toolkit. In some companies, this formed an extension of their sourcing process and in the others it was a standalone product.
In all companies, it was clear that individual and organisational attitudes and behaviours were perceived to be of equal importance to tools and mechanisms. However, tools were seen as a valuable means to improve the quality of interactions between the buying and selling organisations and a number were consistently identified as key for unlocking supplier value.
1 | Supplier segmentation
Segmentation of the supply base to identify the most important suppliers (typically 15-150) is the most commonly used SRM tool. Criteria used for segmentation confirm that SRM is used both to protect and secure the organisation as well as obtaining additional value beyond the contract. The most frequently used segmentation criteria were spend (historic, forecast or both), value opportunities, dependency, risk and business impact, account attractiveness and relationship complexity.
2 | Relationship governance
Clarification and documentation of roles, responsibilities and interfaces on both sides of the relationship is another foundation step. The most common approach is for category managers to take responsibility for the commercial management of a number of the key suppliers within their category portfolio, with operational management undertaken by business stakeholders.
In the most advanced organisations, a small number (five to 25) of dedicated supplier management roles have been established within the procurement organisation. Most organisations have also allocated an accountable executive to sponsor each strategic relationship. This gives clarity to suppliers on executive roles and, usually, improved access – one of the key inhibitors of value creation identified by suppliers in previous research.
3 | Performance scorecards
The tool most frequently identified as being critical for unlocking value from suppliers was the performance scorecard. As well as monitoring performance, this was seen as key for identifying improvement opportunities and measuring progress in implementing opportunities.
Most scorecards use traditional criteria that are built on quantitative measures derived from ERP systems and focused on cost, quality and delivery. Although these measures are based on hard facts and data, their perceived weakness was that they tend to be backward-looking, lagging measures.
Most of the study participants supplemented these measures with qualitative relationship criteria. These measures were derived from perception surveys of people involved in the relationship. These were felt to provide forward-looking, predictive information that gave a richer perspective on performance and potential opportunities. Advanced organisations gather qualitative data on a 360-degree basis, by also surveying their strategic suppliers for feedback on their own performance and then building the results into an overall scorecard.
4 | Structured review meetings
Leading organisations have created a tiered range of meetings that are consistent and linked where needed. Strategic reviews involving executives, technical subject matter experts and relationship leaders from both sides are held on a six-monthly or annual basis. These typically include sharing of strategies, long-term plans and areas of investment over a multi-year horizon, as well as market, regulatory and geopolitical trends. This information is used to identify risks and opportunities. They also evaluate improvement initiatives under way, operational performance, key risks and formal after-action reviews of significant initiatives or events.
The second type of meetings is operational reviews. These involve relationship leaders and people responsible for the day-to-day management and are held monthly or quarterly. They focus on reviewing improvement initiatives, operational performance and risks in more detail than at the strategic reviews.
Bringing together the right people from both sides of the relationship into review meetings, with an agreed agenda and focused on the topics and results in the performance scorecard, created a more structured environment. Study participants reported a more beneficial focus on setting performance targets and managing performance levels. Joint opportunity identification, improvement progress management and risk mitigation were also more effective when managed through these meetings. Another benefit of the review meetings is the foundation of trust, mutual understanding and collaboration that develops over time.
5 | Supply chain analysis and process re-engineering
The improvements and opportunities identified through scorecards and review meetings often result in structural analysis and challenge of existing supply chains and processes. The fundamental redesign of cost drivers has repeatedly unlocked savings in the range of 10-30 per cent for leading organisations. Study participants feel that this level of change is rarely achievable through sourcing exercises as there is a level of trust and understanding required before suppliers and internal stakeholders are willing to commit the necessary resources.
While there is often a role for procurement to play in supply and value chain analysis, internal and external experts in lean and Six Sigma are required to fully exploit these opportunities.
6 | Relationship strategy
Although only used by the most mature companies, a one, three or five-year relationship strategy or account plan was identified as a key tool for formalising and agreeing the approach to managing key suppliers, although resource constraints often prevented their creation. They provided a way to prioritise opportunities, identify risks and dependencies and agree governance. They were felt to be particularly important for suppliers that cross country, category or business unit boundaries.
The relationship strategy is anchored in relevant long-term category level strategies. These address the future strategy and needs of the business and include end-product road maps and volumes, technology road maps, forecast subcategory spend and subcategory interdependencies.
Although the companies in the study are recognised as having relatively mature SRM programmes, their approaches to tracking and measuring the benefits delivered remain fairly nascent and unsystematic.
Study participants used five practices to measure the benefits of SRM. Sometimes one approach was used exclusively, but frequently a combination was used.
1 | Individual scorecards
These were the most often used method is to track improvements through scorecard and KPI performance at the individual supplier level. These measurements typically involve establishing a standard set of KPIs, baselining existing performance and measuring improvements. The advantages to implementing this practice are that it is relatively easy to do, it allows for cross-company comparisons if the same metrics are used and fosters a competitive spirit between suppliers. The acknowledged weakness is that most of the metrics are relative indicators of improvement, rather than quantifiable financial outcomes.
2 | Existing procurement benefit measurement
SRM improvements that resulted in cost-down savings being delivered, either cost reduction or cost avoidance, were usually registered through the existing procurement benefit measurement systems. However, only a few leading organisations categorised specific savings as SRM-generated. For the majority, this made it challenging to identify SRM savings generated at a supplier level and impossible at an aggregated SRM programme level.
This contrasts strongly with sourcing, where all procurement teams aggregate and report sourcing savings at both the category and organisational level. Aggregating value from sourcing and demonstrating its impact on business metrics has been a key lever for gaining visibility, credibility and influence with executives and, ultimately, resources for the successful companies. Some of the respondents recognised that this lack of consolidation underplayed the contribution of SRM and reinforced organisational perceptions that sourcing is the main route to obtaining more value from third-party costs.
3 | SRM-specific measures
A small number of pioneering organisations in the study have taken a different approach and worked with their finance team to agree on specific measures that address the broad range of benefits derived from SRM, beyond cost-down. The agreed value measures are linked via key performance indicator trees to business metrics. These companies also set aggregated targets for SRM value delivery and create clearly defined alignment between their SRM goals and the organisational strategy, goals and metrics in terms of growth, product development, innovation and revenue.
4 | Use of case studies
The most mature companies reported that the impact of SRM is often communicated to executive leaders in a narrative format that summarises improvements or documents success stories. The use of compelling stories and case study detail provides a more nuanced understanding of successes and failures than quantitative data alone, and is often just as persuasive as numbers.
5 | Risk reduction
Measuring the value of SRM with respect to risk is particularly complex as it is innately difficult to report on events that are averted. However, some of the successful companies have addressed this challenge by building a historical baseline of adverse events such as supply disruptions, safety breaches and reputational compromises. They then measured the trend downwards over time to assess the risk reduction delivered.
All organisations reported a significant amount of relationship or enabling value achieved as a result of their SRM programmes. The view of all participants was that this relationship value was a vital foundation in order to deliver the more tangible business and financial values that their organisations required. Relationship value identified in the study included mutual understanding, clear governance, mutual trust and open communication.
In terms of financial, and associated business, value, the following emerged:
1 | Revenue up
Most companies in the study had delivered increased business revenues as a result of SRM. However, they often found it very difficult to ringfence a particular revenue increase and apportion it to a specific SRM activity. It was also felt to be a politically sensitive issue that could create a barrier to future SRM activity.
One company that had been tracking revenue benefits informally calculated these to be in excess of $1 billion. Key revenue up-related business benefits included product innovation, speed to market, new market access, strategic alignment/influence and supplier resource investment.
2 | Value up
Value-up benefits were generally the first to be delivered, often as a result of scorecard-tracking and initiating improvement efforts to address low-scoring metrics. Key value-up related business benefits included service-level and quality improvements.
3 | Cost down
At the level of individual relationships, study participants regularly identified the achievement of cost-down savings of 10-30 per cent. This was frequently through collaborative supply chain analysis, process re-engineering, changing specifications or redesigning the supplier’s remuneration model. Key cost-down business benefits included process efficiency, reduced inventory, supply chain efficiency, specification rationalisation, demand reduction, price reductions and favoured customer pricing.
4 | Risk down
Types of supply risk that SRM was seen to impact tended to depend on the corporate and procurement-specific risk frameworks used. Wherever relevant, SRM risk-down value generation was also reported in corporate scorecards.
Key risk-down related business benefits most frequently mentioned by study participants included improved predictability of supply, a fall in the number of adverse events, dependency reduction and reputation protection.
A number of organisations reported some immediate improvement in value delivered following the implementation of SRM (particularly scorecards). However, the typical time required for relationships to start delivering cost-down and risk-down value was typically six to 12 months, with value-up taking 12-18 months before commencement of value delivery. With some adversarial relationships, it had taken more than two years to build trust and three-five years before significant value was delivered.
Building the business case for SRM
In general, SRM does not require significant incremental investment. To a large extent, it is a shift of perspective and a change in the way a company works with suppliers more than starting to do a bunch of new things that require hiring more people or spending money on tools. Some key considerations based on the study are:
- Consider whether your organisation needs a return on investment-based approach or whether it has philosophically bought into the value that SRM can deliver.
- Review all savings delivered historically to identify existing delivery from SRM. This reached 80 per cent at one organisation.
- Estimate the costs and issues incurred that could have been avoided if more resources had been dedicated to managing relationships.
- Start small and build the case for investment. One organisation built savings delivery from $20 million in year one to $350 million in year four, with significant revenue benefits on top.
- Consider setting a target for post-contract savings, with one per cent used by one organisation. This generated an ROI>100:1 and increased dedicated SMR resources from two to 23.
- Invest effort in tracking and recording all benefits targeted and delivered, both quantitative and qualitative. Qualitative stories capture executive attention.
- Work with finance to ensure a full range of benefits gets captured in the benefit-tracking tool. Make links to business metrics wherever possible.